The merger, which would create one of the worlds largest online gaming and betting chains, generating revenues of £1.1 billion.

Shares in listed Betfair Group were up 18.6 per cent in early Wednesday trading.

Its the latest consolidation move within the gaming sector, coming just weeks after rivals Coral and Ladbrokes agreed a £2.3 billion merger.

Both Paddy Power and Betfair have cautioned there is no guarantee the deal will go through, though they have agreed in principle to rebrand the merged businesses as Paddy Power Betfair, with Paddy Power shareholders owning 52 per cent and Betfair 48 per cent.

The boards of both companies said they expect to make a further announcement in coming weeks.

In a joint statement issued to the stock exchange, the companies said: “The possible merger would create one of the world's largest public online betting and gaming companies by revenue with enlarged scale, capability and distinctive and complementary brands.

“The combination has compelling strategic logic and represents an attractive opportunity for both companies to enhance their position in online betting and gaming and to deliver synergies, customer benefits and shareholder value.”

If the merger is successful, Paddy Power shareholders will receive a special dividend of £58 million.

Betfair chief executive Breon Corcoran would become head of the combined group if the merger goes ahead.

Paddy Power was founded in 1988 and has more than 350 betting shops in Ireland and the UK.

Betfair entered the market in 1999 when professional gambler Andrew Black and city professional Edward Wray launched The Sporting Exchange and then the Betfair Betting Exchange the following year.

It was the first bookmaker to allow punters to take a bet and then subsequently bet in play.